Time for Talking

With a provincial election anticipated in Alberta sometime in 2012 at the very latest, now is the time to talk to provincial MLAs about getting rid of the province’s much-maligned industry-wide rate adjustment.

The message to politicians is obvious: consumers are not well-served by a system allowing insurers only one shot a year at trying to get the rates right. Not only that, but the benefits of a free-enterprise system are definitely muted when the entire industry’s experience dictates rate adjustments.

Currently, the Alberta Insurance Rate Board (AIRB) is required under Section 656 of the Insurance Act and Section 4 of the Automobile Insurance Premiums Regulation to conduct an annual adjustment process. This uses the industry-wide experience to determine whether premiums for basic coverage on private passenger vehicles should be adjusted.

A central knock on the system is that it is too slow. If the rates aren’t right during the one adjustment period – and insurance, being predictive in nature, is not an exact science – then insurers have to wait one full year until the next adjustment period to try again.

In the meantime, insurers’ claims costs go through the roof. Thus, when the next adjustment comes one year later, insurance companies might have to ask for higher increases than if they had been able to adjust their rates incrementally, on an as-needed basis. This is not good for consumers.

Basically, more flexibility to set rates on an as-needed basis means the insurer won’t be in a position to have to ask for big increases to offset claims trends. As the Insurance Bureau of Canada (IBC) put it in a recent submission to the AIRB:

“A more competition-based filing system would be able to take into account the diversity of insurers with different business models and, by incorporating a simplified filing approach, would permit companies to undertake more maintenance-type filings and move quickly to react to changes in market conditions. In the end, consumers stand to benefit from more stable and affordable auto insurance, which is the inevitable outcome of a system that encourages and strengthens the competitive market forces that are the hallmark of success throughout most of Canada’s economy.”

There is a golden opportunity here for some movement on this, for two reasons.

First, the AIRB is in the insurers’ camp on this issue. In fact, it has been since at least 2008, if not before. AIRB announced in April 2011 it intends to review premium regulation with a view towards recommending a file-and-approve system. This essentially allows insurers to file for rate adjustments when they see the need. The new rates are effective immediately upon regulatory approval.

But regulators are under the control of their political masters – politicians. Which brings us to our second reason for being encouraged.

The Canadian Council of Insurance Regulators (CCIR) has recognized in its strategic plan the importance of bringing the public and their elected representatives into discussions about insurance regulation.

“[We] have to focus on educating, building, understanding and getting the best information we can into the hands of our decision-makers,” CCIR chair Danielle Boulet said in an address to life insurers, though she could just as easily be talking about P&C insurers as well. “As well, it is the regulator’s responsibility to actively bridge the gap between policymakers and the industry, as regulators have a unique window on the industry.”

Congratulations to the regulators for doing their part. But the insurance industry also has a responsibility to reach out to decision-makers. The industry plays a huge role in making sure elected politicians clearly understand the interests of the public are aligned with the insurance industry in this matter of rate-setting.

When it comes to scrapping the industry-wide adjustment, the industry now has a golden opportunity to do what’s best for everyone.